Chinese companies facing pushback in the United States are covering their bets in Hong Kong

By
Rex Rose
Alibaba stock pops in Hong Kong debut

NetEase attributed its decision in part to the need for more funding, which it intends to use to expand its business. But he also clarified that he thinks that the United States is becoming more hostile to Chinese companies, as regulators and legislators are considering new rules that would lead to tighter control. Some restrictions may even make it more difficult for companies to go public or to continue trading in New York.

The issuing of these rules “could cause investor uncertainty for the issuers concerned, including us, the market price of our [US shares] it could be adversely affected and we could be eliminated from the list if we are unable to “meet the requirements,” NetEase wrote in documents filed on the Hong Kong Stock Exchange.

The recognition of NetEase is a sign of how much the relationship between the United States and China has worsened and how much it is at risk for Chinese companies that do not develop a viable backup plan.

Other companies are also considering Hong Kong

“Chinese tech giants view Hong Kong as a middle ground,” said Brock Silvers, Chief Investment Officer of Adamas Asset Management, based in Hong Kong.

He added that the city is “under Chinese control, but still has access to the US dollar”. Unlike mainland China, where there are strict obstacles to capital entering and leaving the country, Hong Kong allows capital to flow more openly. The city’s currency is also freely convertible.

NetEase will not be the last company to look to Hong Kong. About 37 Chinese companies meet the requirements to do so, according to data provider Refinitiv, based on their market capitalization, amount of revenue and ability to comply with regulations.

At least a handful of companies trading in New York already seem to consider it. E-commerce company JD.com (JD) received approval from the Hong Kong stock exchange for a secondary listing in Hong Kong and submitted a prospectus made public on Friday. Bloomberg reported that the company could start trading as early as this month. Technology companies Baidu (BIDU) is Trip.com (TCOM) could consider similar plans, according to various Chinese media reports.

Baidu and Trip.com declined to comment. But Robin Li, Baidu’s founder and president, recently suggested that his business could turn to Hong Kong if necessary.

“We are really paying close attention to the restrictive US government rules on Chinese companies,” Li he told state-run China Daily last month. “We are discussing internally what we can do to address it, including a secondary list in Hong Kong.”

Motivations in evolution

New York has long been an attractive option for foreign companies to go public. Wall Street boasts the world’s largest stock exchanges and the ability to tap into them huge amounts of investment capital. For Chinese companies, a New York listing also offered them the opportunity to avoid strict IPO rules in China, including a ban on companies with certain types of shareholder structures.

But Beijing has eased some of these restrictions in recent years as part of a push to get Chinese companies back home. The country is trying to improve its position as a great technological superpower, and the closer some of its most appreciated companies are, the greater the influence on them that the government can have.

Alibaba's return home is about China's pleasure and the purchase of trade war insurance
The desire to impress Beijing has been widely cited as a big reason for Alibaba’s decision to list in Hong Kong last fall – although analysts also stressed tensions between the United States and China and also the need to mitigate political risks.

“The political calculation that prompted listed technology companies in China to search for secondary lists was originally Beijing’s desire to bring those companies under its bureaucratic control,” said Silvers. “But it evolved in light of the trade war and subsequent decoupling.”

It is not entirely clear how quickly new potential U.S. regulations could cause problems for Chinese companies trading in New York. A bill that has not yet passed the United States House of Representatives, for example, is destined to do so compel those firms to open their books to American regulators – a condition resisted by Beijing, which requires companies that are traded overseas to keep their control documents in mainland China where they cannot be examined by foreign agencies.

But that bill would force those companies to clear the list if they couldn’t be controlled for three consecutive years, according to Goldman Sachs analysts.

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The potential for tighter regulatory control, however, “will also likely accelerate their dual – listing trend in the [Hong Kong] market, “Goldman analysts wrote in a recent report.

Pressure also comes from the Trump administration. Secretary of State Mike Pompeo praised Nasdaq on Thursday for proposing new compliance rules that could affect Chinese companies, adding that other exchanges should consider similar regulations.

“American investors should not be subject to hidden and undue risks associated with companies that do not respect the same rules as US companies,” Pompeo said in a statement. “Nasdaq’s action should serve as a model for other exchanges in the United States and around the world.”

Pros and cons in Hong Kong

A wave of secondary prices could also be of great benefit to Hong Kong’s financial markets, where long-term stability was threatened by last year’s anti-government protests, the further invasion of Beijing and growing tensions between the United States. and China.
The United States could end its special relationship with Hong Kong. But for western companies, it's complicated
Jefferies analysts, for example, recently suggested that the Asian financial hub’s landmark Hang Seng Index (HSI) eventually it will have a “full makeover” as more Chinese companies on the Internet list Hong Kong, eliminating more city-centered stocks such as banks and real estate companies. Such an “emigration quote” could add nearly $ 560 billion to Hong Kong’s market capitalization and raise $ 28 billion in capital.
In a recent research note, Jefferies analysts compared the Dow Jones Industrial Average (HINDU) to the Hang Seng, stating that the New York index outperformed the Hong Kong benchmark due to its willingness to replace “stagnant” companions with “successful, fast growing” ones.

“We believe that [Hang Seng] it will undergo a similar change in the coming years and will become an index that primarily reflects the growth of China’s new economy companies, “they wrote.

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After all, Alibaba has been a great success story for the city. Hong Kong’s listed shares have risen 19% since they started trading last November.

“Other companies are following suit,” said Hong Hao, chief executive officer and research manager of Bank of Communications International in Hong Kong. “It is worth having a plan B.”

Trading in Hong Kong is not without risk. The city has become a critical point in the Washington-Beijing clash: President Donald Trump said last week that the United States wants to end its special economic and commercial relationship with Hong Kong, which could endanger city status as a center for international affairs.

Trump’s announcement, however, did not include any specific sanctions relating to Hong Kong’s financial sector. And for now the Hong Kong dollar peg on the dollar appears to be safe: city officials have reassured investors this week that they have enough reserves to maintain the peg, which keeps the city’s currency trading within a narrow range and stable.

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